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Fiscal Condors

28 October 2019 by jbchevrel

Argentina CDS underperformed the EM sovereign complex today, wider by more than one point to 62%on the 5y contract. € cash had opened close to unchanged around 40. Argy risk cheapened gradually throughout the session. The curve flattened also about 1.5 point with the 1s5s now worth about 3.5%. The general elections in Argentina delivered +/- the result expected, especially since aug 11th primaries. The first-round was enough for Fernandez of the so-far-opposition party Frente de Todos (FDT) to win with the former populist President Kirchner (CFK) as VP. They will be officially in on next DEC 10th. Fernandez got 48% of the votes and thus beat the 45% threshold needed to secure the victory in 1st round, without a second round. Outgoing president Macri got 40% votes. The spread was lower than in Aug 11th primaries (Fernandez 49.2% Macri 33.1%). FDT won the province of Buenos Aires (most populous) but the city of Buenos Aires was lost by FDT in 1st round, beating the required 50% threshold. According to media estimates, FDT government should have a Senate (Upper House) majority, with 38/72 Macri’s party would then come second at 28/72. What is Fernandez going to do now? During the campaign, he stressed the need to return to growth, led by exports and consumption. On monetary policy, Fernandez stressed the need to lower rates, but advisers of his publicly acknowledged the need to keep deposit rates at or above inflation, to incentivise savings. Regarding FX, Fernandez’s team pointed to 1/ no restrictions on buying FX for current account flows (merchandise, services, dividend, interest) 2/ an obligation to convert (FX) the proceeds from exports 3/ on the capital account side of the equation, they want to limit individual FX purchases to stem o/f. $ purchases have been high recently, BCRA selling >$1.5b last week.